Pricing a product and the impact of R&D costs

business acumen pricing pricing strategy R&D
New answer on Jul 10, 2021
4 Answers
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Anonymous A asked on Jul 09, 2021

Should you consider R&D costs in the pricing of a product? Isn't it technically a sunk cost?

(edited)

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Ian
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replied on Jul 10, 2021
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Hi there,

It literally depends on whether R&D has already occured...

If the case is about the decision to launch a new product, you need to consider R&D costs and what pricing could cover them.

If R&D has already occured, technically you should account for R&D, however, you absolutely need to keep it in mind when pricing. Ultimately, you're always trying to maximize profits, but attributable R&D costs are important to consider. This is especially true of you can't do value-based or benchmarking pricing but rather have to go cost based (in this case you need to base prices off of your costs incl R&D)

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Adi
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replied on Jul 10, 2021
Accenture, Deloitte | Precision Case Prep | Experienced Interviewer & Career Coach | 15 years professional experience

The pricing strategy will determine whether you consider it as sunk costs or not. There are so many different pricing strategies:

  • Price at par, above, below competition
  • Discounts
  • Premium
  • Short-term reactions to competitive pressure, regulations 
  • etc

To keep things simple and if this is relevant for the case, my personal advice will be to better exclude it as an one off investment/sunk cost. But like I say, read/understand the case carefully to make this decision.

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Anonymous B updated the answer on Jul 10, 2021

If your goal is profit, you should base your pricing on two factors:

- What customers are willing to pay (which is below or in line with 1) percevied value created 2) cost for comparable alternative solutions)

- In such a way that you the reach the volume that maximizes the total gross profit

As you point out, no previous investment or fixed costs is relevant for pricing.

If you are making an investment decision, then of course all future cash flows including R&D are important to include.

(edited)

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Francesco
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replied on Jul 10, 2021
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Hi there,

It depends on what is the goal of the pricing strategy and the stage you are in.

  1. If you want to find the price to breakeven, then you should include it as it is still a cost
  2. If you want to find the minimum price you could charge to at least recoup future costs:
    1. If you are defining the pricing strategy before incurring the R&D costs, then you should include it
    2. If you are defining the pricing strategy after incurring the R&D costs and it is sunk, then you should not include it

Hope this helps,

Francesco

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Ian gave the best answer

Ian

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